This is a common conundrum for many who have maxed out an IRA, and wish that they could open another tax advantaged retirement account. They feel stymied (and punished) by the fact that their attempts to make a good home for their children limits the retirement options. Luckily, there is another option that I am happy to tell you about.

Spousal IRA

We are so used to retirement accounts being something that we get through an employer, or we get hung up on the requirement that you need earned income before you can open an IRA, that we sometimes forget that stay at home spouses have options too. The spousal IRA is a great way to boost your retirement savings with a tax advantaged account, and one that many single income households should seriously consider.

If you are the spouse of someone who has an earned income, you can have an IRA in your name, even if you aren’t actively earning an income. In this arrangement, your spouse, who earns income, makes spousal contributions to your IRA. There are eligibility rules, though. You have to be married, and you have to file a joint tax return. If the income earning spouse files as head of household or you file separately, the spousal IRA thing doesn’t work. Review your situation, and if you are looking to boost your retirement savings, consider contributing to a spousal IRA.

A spousal IRA works just like any other IRA. The same income limits and contribution limits apply. So, if you open a Roth IRA and contribute to it on behalf of a stay at home spouse, you are still subject to the income phase out once you make between $167,000 and $177,000 for 2010. And, of course, the contribution limit is $5,000 (unless you at least 50; then it’s $6,000).

The good news is that you can contribute the limit of $5,000 to the spousal IRA on top of the $5,000 you contribute to your own IRA. However, in order to make it work, the spousal IRA has to be held separately (not a joint IRA), and be established in your spouse’s name, using her or his Social Security Number (or tax ID number). This can help you effectively double the amount of money you contribute to one type of tax advantaged retirement account without having your spouse go out and get a job.

Reminders About IRA Contributions

Because spousal IRAs work like any other IRA, it is important to be up on the rules of IRAs in general. Some things to remember:

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A great reminder, Miranda. My wife and I both try and max out our Roth IRAs annually even though she stays at home. It’s a sacrifice, but I see it as only a smart thing. With 2 people, you get twice the tax savings.

While it seems clear that taxes are going up in the near future, can you be confident about what tax rates will be like 30-50 years from now? For people in their 20s, 30s, and 40s, isn’t that the time frame they would need to think of in terms of comparing tax rates?

Good article. Of the options, I would certainly consider the ROTH IRA. Taxes are going up in the future, not down. The ROTH IRA insulates you from that. While you are contributing after tax income, it then grows and can be withdrawn tax free.

Yes, this is a conundrum for many young couples starting out, especially for mothers who may need to stay home and take care of the children. With this option, it makes it a lot better for those who have single-income households. I didn’t know about this option prior to reading this post.

That’s a really good idea. I think it’s important for both spouses to have savings for retirement and to start earlier rather than waiting until the stay at home spouse goes back to work to take advantage of the power of compound interest.

Having an IRA is a great for the stay at home spouse. I still don’t understand why they have income limits that prevent contributions if you earn over a certain amount. That has never made sense to me.

I think the IRA income limits are just part of the whole “the rich shouldn’t get as much tax incentives” theory. It’s the same philosophy that led to a progressive tax system, alternative minimum tax and many other tax incentives in our system.

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